Question

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations. Month Labor-Hours Machine-Hours 1 725 1,362 2 720 1,411 3 680 1,526 4 740 1,460 5 790 1,589 6 760 1,583 7 730 1,398 8 725 1,304 9 700 1,462 10 795 1,544 11 670 1, 296 12 720 1,608 Overhead Costa $ 102,689 103,794 109,906 108,229 116,258 114,544 106,967 102,010 106,315 113,060 96,820 108,520 Required: a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours. b. Managers expect the plant to operate at a monthly average of 1,700 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation? Complete this question by entering your answers in the tabs below. Required A Required B (Prey 1 of 2 !!! Next >

Answer 1

Solution:

Requirement A:

Below is the calculation of variable cost and fixed cost:

Month Overhead Cost Machine Hours 12 1608 Hours 11 1296 Hours High Machine Hours Low Machine Hours 108520 96820 11700 Difference 312 Variable cost per Machine Ho = Difference in Overhead Cost / Difference in machine hours Variable cost per Machine Hours = $11700 / 312 Hours 37.50 (Requirement A-1) Fixed Cost = Total Overhead Cost for High method - Variable cost = 108,520 - (1608 Hours * $37.50) =108,520-60,300 -48,220 (Requirement A-2)

Requirement B. Overhead cost for 1700 Machine Hours next year:

Variable cost for 1700 Hours = 1700 hours * $37.50 = $63,750

Fixed Cost = $48,220

Total Ovehead Cost = $63,750 + $48,220

= 111,970